Wednesday, November 9, 2016

FreightCar America

Currently, we are probably in a period nearer the bottom of the cycle than the top. All of the public railcar manufacturers are reporting horrible order and backlog numbers, with RAIL delivering 1,214 cars in its most recent quarter, but only taking in orders for 620!

Still, RAIL's current backlog sits at 5,613. This gives it more than a year of work at the current pace of production.

I have no idea how long the downturn in this sector will last. It will depend on things like coal and other commodity use, changes in regulations, replacement rates, safety, economic growth rates and technology. So in addition to price, the factor in which I'm most interested in is whether a company can outlast a downturn that takes many years.

RAIL ticks the boxes here, with no debt and cash of $46 million. Current assets cover *all* liabilities about 2.5 times over. Inventories will be coming down according to management, so that even if the company experiences losses, it may continue to generate cash.

Recently, the stock has gotten decimated. It has fallen in price by 70% from its 2014 high, is down 40% in the last year, and 25% in the last month. This is exactly the kind of blood-in-the-streets-thanks-to-a-falling-knife that attracts my interest.

The company is now a net-net! Current assets (mostly inventory) come in at $243 million vs total liabilities of $99 million, for a difference of $144 million. Yet the entire company is for sale for $130 million!

Note that this is not the typical poorly run company you are used to seeing on net-net lists lately. The company's track record is not amazing by any stretch, but it is not a consistent loser. Over the last 10 years, ROIC has been above 9% four times. This company had operating earnings of $41 million as recently as 2015!

I don't see any catalysts on the horizon. But it's worth noting that this is one of the smaller railcar manufacturers. To the extent that there is industry consolidation, shareholders of the acquired firms could be winners. Insiders own just 3% of the company, so no one has the power to block such a transaction in the interest of protecting his own job.

On the other hand, no insider ownership suggests management might be careless with the firm's capital. This is certainly a risk, but probably more so during boom times. If we get back to times that like, shareholders will likely have made a terrific sum already.